Source: Presidencia.
With Brazilian President Luiz Inácio Lula da Silva, better known as Lula, returning from his recent visit to China, much buzz has been generated about his and Chinese President Xi Jinping’s successes at dealmaking. In early April, Mexican President Andrés Manuel Lopez Obrador (AMLO) similarly threw a friendly sign to China under the backdrop of rapidly growing bilateral trade and investment ties. He made the unusual move of sending a letter to Chinese President Xi Jinping asking him for help to tackle Mexico’s fentanyl crisis, ruffling feathers in the United States.
With distinct objectives, Brazil and Mexico are increasingly open to engagement with China, which is happy to oblige in partnership with both economies. The last few years have seen China come out of its COVID-19 cocoon and re-assert its influence in the region beyond pandemic-era vaccine diplomacy. With Lula’s ambitious foreign policy and Mexico’s blossoming ties with China, 2023 promises to be a big year for China’s influence in Latin America. U.S. policy would benefit from staying alert to the latest developments and crafting attractive alternatives to dealmaking with China.
Is Brazil Back?
Lula is a man with a bold vision. “Brazil is back,” he said in his victory speech after winning last year’s presidential election. With China, this vision seems to be coming to fruition—Beijing and Brasilia signed 15 deals covering topics ranging from satellite technology to the digital economy to the automotive industry at Lula’s April visit. At that event, Lula called for BRICS countries to use their own alternative currency instead of the U.S. dollar in trade. Lula and Xi also committed to China and Brazil staying in active communication about the Russia-Ukraine war. In a clear rebuke, Lula called on the U.S. to stop “encouraging” war in Ukraine.
While analysts predicted that Lula would cozy up to China and adopt a stance on the war that leaned pro-Russia, Lula’s critical rhetoric towards the U.S. was unexpected. Analysts anticipated that Lula would chart a middling path between the two great powers to secure a friendly arena for Brazil’s own foreign policy vision. Last month’s visit to China makes clear that Brazil continues to see China as a crucial partner in advancing a multipolar world with weakened dominance from the United States.
Brazil’s trade with China is booming, hitting a record USD 150 billion last year. Brazil also accounts for 47 percent of China’s foreign direct investment in Latin America. Before Lula’s visit, China had also lifted a suspension on imports of Brazilian beef, one of Brazil’s largest exports to China. In late March, a Brazilian bank controlled by a Chinese parent became the first financial institution in Latin America to be part of China’s Cross-Border Interbank Payment System, which settles trade deals in Renminbi (RMB)—the People’s Republic of China official currency.
While Lula did visit the U.S. in February and bonded with President Biden over their commitment to preserving democracy and fighting climate change, the results of that visit were underwhelming. The most visible U.S. commitment from that visit was an initial USD 50 million donation to the Amazon Fund, a billion-dollar fund to reduce deforestation in the Amazon Rainforest—which is minuscule compared to the billion-dollar deals Brazil received from Chinese policy banks in the late 2000s and early 2010s. By contrast, Brazil’s agenda with China is more “concrete, wide-ranging and far-reaching,” according to Sergio Amaral, Brazil’s former ambassador to the United States.
Seeing how Lula navigates his renewed commitments with China without angering the United States will be a crucial development in China-Latin America relations this year. Additionally, how Lula exercises regional leadership closer to home to broker a China-Mercosur trade deal—which he’s come out in favor of—will be crucial to the region’s growing, formalized trade ties with China. Under a very different context with distinct goals, Mexican President Andres Manuel Lopez Obrador (AMLO)—Lula’s counterpart in the region’s second-largest economy—has a similar task of bending towards China while not irking the United States.
Mexico Hangs in the Balance
In April, AMLO called upon China to help solve Mexico’s fentanyl crisis, caused largely by demand from the United States. This strange yet compelling move by AMLO speaks to a more significant trend in China’s role in Latin America and the Caribbean. China has increasingly filled in, economically, where the U.S. had previously dominated. Twenty-two Latin American and Caribbean countries have officially signed onto the Belt and Road Initiative, China’s flagship global infrastructure initiative. Additionally, China has completed or is negotiating free trade agreements with five Latin American countries, including three of Brazil’s commodity-exporting neighbors–Chile, Peru, and as of December last year, Ecuador.
China’s commercial penetration in South America and increasing influence in Central America is not debatable and has been a long time coming. Mexico’s decided turn towards China represents the “nail in the coffin” for U.S. policy in the region. Mexico is the U.S.’s strongest ally in the region. The country is the U.S.’s largest goods trading partner, and it shares a border, an automobile manufacturing supply chain, and a significant trade agreement, the U.S.-Mexico-Canada Trade Agreement (USMCA). Mexico has not participated in major regional efforts to court China to the same extent as Brazil. But now, Mexico has asked China for help.
In response to these developments, the United States slapped sanctions on Chinese chemical suppliers whose products are used to make fentanyl. Instead of engaging directly with Mexico and acknowledging the systemic failures in U.S. domestic policy that keep fentanyl demand high, the U.S. resorted immediately to a “beat China” response. However, the U.S. can’t strike China out of Mexico, with trade war and COVID-fueled ties between the two countries at all-time highs. China’s exports to Mexico increased by nearly 30 percent in 2022, on top of a 50 percent increase the previous year. Chinese Foreign Direct Investment (FDI) to Mexico hit a record high of USD 400 million in 2021. Chinese companies are responding to trade-war-era restrictions by nearshoring to Mexico, reducing freight costs while evading thorny tariffs.
With AMLO’s reactionary and inflammatory rhetoric towards the U.S., Mexico’s China ties are one to watch this year. AMLO has threatened to meddle in U.S. elections with an “information campaign” in the face of Republican intentions to use military intervention to curb drug cartel activity in Mexico. He has also accused the Pentagon of spying on Mexico and railed against the State Department’s reporting of human rights in Mexico. Earlier this month, he sent a letter to the Biden administration complaining of U.S. support of Mexican opposition groups. The Mexican president is responding to U.S. interference and criticism with more antagonism and affinity to China, while Brazil is cozying up to China in hopes of building a global order that decenters U.S. hegemony.
What Should the United States Do?
As Lula and AMLO each navigate the tightrope of courting China while not angering the U.S., the U.S. must offer these regional behemoths deals and partnerships with more heft on equal ground. The United States must consider its unique value propositions to Mexico and Brazil, but more broadly to the region. Could it be the center of a Latin American production sharing network, as it already has in autos with Mexico and Canada? Could it clean up its immigration policy so it doesn’t shift the blame and responsibility squarely on the countries sending migrants? Could it rebuild trust and recognize harm, to be a credible, capable alternative to China?
As the U.S.’s key partners are leaning on China, the question remains on how the U.S. can too be a source of support to these countries. The U.S. has taken leadership in climate change by committing USD 500 million to the Amazon Fund, following up on an initial USD 50 million commitment. However, funding approval from a GOP-controlled House may prove challenging. Rebuilding U.S. legitimacy in climate action after disastrous years under President Trump is also difficult. Currently, Chinese and European firms are funding Latin America’s energy transition due to classification issues in the United States, which predominantly does not fund middle and upper-middle income countries like those in Latin America. The U.S. can leverage the International Development Finance Corporation to make additional deals and support Latin America’s existing renewable energy initiatives.
Another avenue is to foment existing economic advantages and ties. For Mexico, the U.S. could also encourage its firms to nearshore there and shift supply chains away from China. However, this solution will likely be politically costly as nativism and nationalist, anti-Mexico attitudes are on the rise. For Brazil, the U.S. is already far outstripping China on FDI, so continuing to encourage FDI is key. The U.S. faces complicated choices ahead to deepen ties with these two regional behemoths. Some degree of Chinese influence displacing U.S. initiatives is unavoidable, but the United States can leverage individual strength points to collaborate with both Brazil and Mexico.
Genevieve Slosberg is a Junior Fellow at Carnegie Endowment for International Peace. Her research focuses on China’s trade and economic involvement in third countries, with a particular focus on Latin America and the Caribbean.
